Starbucks Shares Are Losing Momentum

Starbucks is setting up as a good risk/reward short opportunity.
By Robert Moreno ,

Starbucks (SBUX) - Get Report , which reported earnings last week that were in line with analyst estimates, is up 53% year-to-date -- but a majority of that gain was achieved in the first seven months of the year. Starbucks shares are losing momentum and setting up for a good risk/reward short opportunity.

In August, it met resistance in the $59 area and remained below that level until the breakout that began the October rally. Over the last five trading days, however, a cluster of dark candles formed on the daily chart, suggesting that the stock may be preparing for another pause. The stochastic oscillator has made a bearish crossover and is dropping below its overbought threshold, signs of declining price momentum. Moving average convergence/divergence is in the process of making a bearish crossover, which often precedes a change in short-term trend.

Overall volume has picked up during this potentially negative period, with readings above the 50-day average, and much of that volume has been negative. Even the large positive volume bar that formed on Oct. 30 is potentially negative volume, because volume bars are not the best measure of the direction of money flow. They view up and down volume days as a reflection of the daily close relative to the previous day's close. On this particular day, the close was higher than the previous day's close, so the bar indicated positive money flow.

The accumulation/distribution line and Chaikin money flow measure up and down volume more accurately than the volume bars. They consider it positive if the close that day was in upper candle range and negative if the close was in lower candle range. On Oct. 30, the close was in lower candle range, and the A/D line and Chaikin money flow readings for the day are negative.

Starbucks looks like it is preparing to pull back and offers a good risk/reward short opportunity, using a break below $62 as an entry point, a buy-to-cover stop above the $64 level and the 50-day moving average as an initial target price.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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